Today I am going to try explain one of the most complicated insurance policies you can buy in your lifetime: life insurance with cash value.
And the reason it’s complicated is this extra benefit called cash value. Which seems almost too good to be true.
Or is it?
Read on to find out!
What IS Life Insurance
Before we jump right into the details, let’s start with the basics.
Because if you’re not familiar with what life insurance is, then you might not be able to understand the rest of this article.
So what is life insurance?
As morbid as it sounds, it’s a policy you buy to insure against the loss of your life.
Everyone is human after all and there will be a time when they no longer exist on this earth.
To protect their love ones, especially their family, there’s life insurance one can buy.
And when we mean protection, it’s in the financial sense. Because your family may be currently dependent on you as the bread-winner.
When you are gone, your family or loved ones may struggle financially.
So the insurance is a promise to pay a certain amount when the individual covered passes away before age 100.
How Life Insurance Works
It’s a sensitive topic but I think individuals who have loved ones to care about or families should consider purchasing life insurance.
Whether or not it’s life insurance with cash value doesn’t really matter (in most cases).
Again, I’m not a licensed financial professional so don’t take my words word for word but it’s something to consider.
Okay, so how does life insurance work?
Common Life Insurance Terms
When the policy is purchased from a life insurance company or through a life insurance agent, the person buying it is the one being covered.
Also known as the “insured.”
If you’ve read some of my other articles on this blog, then you know I like to go into details with lots of terms. =)
At the time of the application, the purchaser determines how much they want to be covered.
And this amount is the money that will be paid out from the insurance company upon your death.
Aka “Face Value.”
To the people you specify. Who are called the “beneficiaries.”
For families that are carrying the financial burdens of a mortgage, the future college costs of their kids, etc.
The amount might be more and it really varies from individual to individual.
But you’re here to understand CASH VALUE so let’s move on.
What IS Cash Value
Okay, so with the basics out of the way, we can now jump into cash value of a life insurance policy.
And just so you know, you need to pay for life insurance.
Just like with any other insurance policy.
For example, dental, health and vision insurance policies are also others you pay for.
So what is cash value?
It’s a portion of the premium you pay for your life insurance policy. But allocated separately so it can be invested to grow in value.
The life insurance company does the investing but you can access the cash value as long as the policy is still active.
Cash Value is part of Whole Life Insurance
It’s not all sunshines and rainbows though. Life insurance with cash value has another name.
Or more specifically, a more common name.
Whole life insurance.
So don’t be mislead into thinking that ALL life insurance policies have this additional benefit.
If you’re looking to purchase life insurance with cash value, look for insurance policies that mention whole life.
And know that these insurance policies will cost more.
Because don’t forget that insurance companies are here to make money!
Since you have this extra benefit, premiums are higher than your more cost-effective term-life insurance policies.
Ways to Pull Money From Life Insurance
If you’re still interested in this life insurance and ended up purchasing it, let’s discuss how you can redeem this benefit.
After all, if you don’t use this cash value, it gets returned back to the life insurance company.
When your policy pays out.
So here’s three ways you can withdraw money from your life insurance policy.
Loan from Life Insurance With Cash Value
The first method ties back to why we started discussing cash value in the first place.
If you can’t use it, why bother discussing it?
After some time and you notice that your life insurance policy has been building some significant amount of cash value, why not use it?
To do this, you need to go online and pull up your policy details from your provider.
Or give your insurance company a call.
And ask for a loan against the cash value of your policy.
Contrary to what you may think, the cash tied to the policy is not actually yours.
If the policy pays out, it will pay out the face value MINUS the cash value that was loaned out.
The good news is that it requires very little effort to tap into this cash. No underwriting, just a call or a couple of clicks.
The bad news is that not paying this back to the policy will affect your policy pay out.
Borrow Against Policy
Some policies may not offer this but the ones that do allow you to borrow money against the policy.
In the form of another loan.
Which again will affect the payout of your policy.
But this loan is usually against the dividends that may be paid towards your policy.
Another benefit of these whole life insurance policies.
Terminate Life Insurance
Most things you buy in life can be returned.
Including life insurance.
So if you do decide you no longer need life insurance, you can terminate the policy BUT what you get back in return is the cash value.
And not the sum of all of your previously paid premiums.
To do so, call up your life insurance provider and tell them you want to terminate your life insurance.
Is Cash Value TRULY Yours?
So based on what you’ve read so far, do you truly think the cash value in your life insurance is yours?
If you guessed no, you get a brownie!
As it was mentioned previously, the cash value is tied to the life insurance policy, so it’s not truly yours.
But it’s available to you to use. So leverage it if you can!
Or at least exchange it for additional coverage on your policy.
Where to BUY life insurance
If you’re still interested in buying whole life insurance, you can either contact an insurance company, an agent or better yet, go online!
I purchased my policies through PolicyGenius and they made it super easy for me to shop different policies.
After all, everything now is on the internet for convenience right?
Oh, but if you don’t have your finances in order yet, buying life insurance shouldn’t be a priority.
Check out my personal finance tips here to get the most thing things sorted out first!
Did you purchase life insurance with cash value? Or are you currently considering it?
Leave your thoughts below!